Is Sea Ltd (SE) a good stock to buy now?

Everyone is still bullish on this company, and all its businesses ticks the right boxes on growth and popular sectors. Buy when it dips.

A quick analysis of SEA

SEA largely operates within the Southeast Asian Region - with approximately 64% of its revenue derived from it. A quick analysis of the region's GDP projection shows that Analysts are fairly optimistic about the recovery from the COVID-19 pandemic. Successful vaccine rollouts are crucial for reviving economic activity including tourism -- a core industry for many Southeast Asian countries. Among policymakers and analysts around the region, optimism is mixed with caution over pitfalls. Over the long term, however, it is good to note that emerging and developing countries accounted for 60% of global GDP (Purchasing Power Parity) in 2019, and this figure will continue to climb. Asia plays a pivotal role in this ascent, accounting for 57% of emerging and developing countries’ GDP in 2019.

The Video Gaming Industry is now estimated to be worth $159.3 Billion in 2020, which is a sizeable increase of 9.3% from 2019

The biggest areas of growth are in Latin America and APAC which are expected to grow by 10.3% and 9.9% - Both segments where Garena has a significant market share. Current forecasts estimate the video gaming industry to be worth $268 Billion by 2025.

The global eCommerce market is expected to total $4.89 trillion in 2021. What's crazy is that the APAC region experienced 26.4% growth in eCommerce over the past year.

The global digital banking market size was valued at $803.8 Billion in 2018 and is anticipated to reach $ 1610 Billion by 2027, growing at a CAGR of 8.9% during the forecast period. The Asia Pacific is expected to hold above 65% of the digital banking market by 2026 due to extensive digitization and developments in financial technologies.

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For the company itself, their overall CAGR (2016 - 2020) is at a whopping 66.14%, with their eCommerce segment at a CAGR of 151%. Both the Digital entertainment and eCommerce segments far outstrip the estimated market growth rate.

Free Fire, continued to be the highest-grossing mobile game in Latin America, Southeast Asia, and India for the first quarter of 2021, according to App Annie. Free Fire has maintained this leading position for the past seven consecutive quarters in Latin America and Southeast Asia and two consecutive quarters in India.

Shopee is the market leader in SEA, with the most amount of visits/month, taking over Tokopedia and Lazada. It also has a very diversified revenue source, with monthly visitors coming from various countries.

Their Digital banking segment still remains insignificant, but I expect exponential growth from 2022 onwards. This is because closer to home, MAS, announced that SEA has been selected for the award of a digital full bank license. MAS expects our digital bank in Singapore to commence operations in 2022 upon obtaining the license

Why is this important? With favorable regulations, enhanced digital assets, reliable physical infrastructure, and comprehensive financial schemes, Singapore provide an advantageous environment for FinTech companies to start an operation here. The small island also serves as a sweet spot for businesses that are planning to penetrate the Asia market. With the successful execution of digital banking in Singapore, SEA's digital banking arm is poised for exponential growth within the Southeast Asia region (time will tell if they can execute at a similar level as their gaming and e-commerce arms)

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It is worth noting that the company is still operating at a loss though. But I am fairly optimistic about the company being able to gradually reduce its Cost of Revenue as it scales (with the digital entertainment segment reducing its CoR in proportion to revenue by a steady 9.22% YoY from 2016 and its e-commerce segment reducing its CoR in proportion to revenue by a steady 8.96% YoY from 2018.)

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Definitely a growth stock - if you are confident in the execution of the management.

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I remain bullish on the long-term trajectory of the company.

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Here is a summary of my thesis:

E-Commerce is considered to be mission-critical in today’s context, given the ever-evolving situation with Covid-19. Consumer Behaviours have changed and solidified to spending time online. This can be in the form of Shopping and Gaming to connect with friends. Shopee operates in a large expanding (Total Addressable Market) TAM where the percentage of retail sales in Southeast Asia as part of E-Commerce is still small, compared to mature economies such as the United States. The gamification of Shopee engages consumers as well, which makes the platform even more sticky.

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Digital Entertainment in the form of gaming remains an essential way for people to engage, communicate and have fun. This is ever more true in the context of Covid-19. Furthermore, Free Fire, Garena's self-developed game still remains one of the top games even after a few years. Games are often thought of as one-hit-wonder but Free Fire's continued success shows that Garena's aim of creating an ecosystem and community is very much possible.

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Digital payments in the form of Sea Money. Sea has been awarded digital bank licenses for many countries, including Singapore. The Total Payment Volumes have been growing rapidly. Digital Payments will complement Sea's existing platforms such as Garena and Shopee, where existing users can be tapped on. Digital payments will be able to facilitate and reduce friction for transactions between consumers and small businesses.

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Other Ventures which may not be considered by the market yet in terms of valuation:

Sea Capital, which is managed by David Ma, who founded Composite Capital. Sea Capital will most likely use these investments to acquire or invest in early-stage startups.

Expanding into new countries in Latin America, Brazil, Mexico.

Seatalk- a communications platform for small businesses.

ShopeeFood - Food delivery services.

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Management:

The key personnel in the management all have huge skin in the game. This means that they all hold a substantial percentage of shares in the company. Interest will be aligned with the Shareholder. Founder led, and the company has a simple yet great mission statement. "Our mission is to better the lives of consumers and small businesses with technology." The company is backed by Tencent as well, with Tencent holding a substantial amount of shares in the Sea limited as well.

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The company has a "spawning" trait which is something that Mohnish Prabai talks about in finding multi-baggers. The company started with Garena, then after which Shopee and Seamoney, now Sea Capital, and many more.

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Links to articles regarding Mohnish Prabai:

https://www.gurufocus.com/news/1304111/mohnish-...

https://www.gurufocus.com/news/1304775/mohnish-...

https://www.gurufocus.com/news/1307020/mohnish-...

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Threads previously on Seedly regarding Sea Limited:

https://seedly.sg/posts/does-sea-group-still-ha...

https://blog.seedly.sg/sea-ltd-nyse-se-share-pr...

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Sudhan - the investment lead at Seedly did a lot of good work on Sea Limited!

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I think a lot of people don't talk about Sea Limited because it has grown so much, but if one looks at the total addressable market for all its businesses, the TAM is expanding rapidly as well. I think that at 150 billion market capitalization, it still has a long runway to go, depending on how management executes its strategy.

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Valuation-wise, I think a sum of the parts (SOTP) would be an accurate way of doing the valuation. I think it might be a bit pricey on the valuation side for now but if you are holding long term I think the company is of great quality. Even though the company is loss-making, the loss per order for Shopee is decreasing and the Sales and Marketing as a percentage of revenue/sales are decreasing as well. These are all signs of stepping towards profitability.

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Disclaimer: This is just my thought process and how I think about the company's progress over the years. This is not a recommendation to buy the stock or do anything. Please do your own due diligence and do make a decision for yourself.

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Hope this helps! Invest safely!

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The company is reporting its earnings results for Q2 today, if you are interested, do check it out!

Hi anon, I've talked briefly about Sea's 2021 first-quarter earnings here and its future potential here.

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If you want a deeper dive, you can check out Seedly's exclusive deep-dive stock report on the company here.
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Hope the above article/report help you.